If INREV's index is to be used to benchmark performance as intended, more managers need to contribute data, as Andrea Carpenter reports
January saw INREV enter its annual round of data collection for the INREV Index. Performance data provided by members and other fund managers for non-listed property funds will contribute to the calculation of the only definitive pan-European property fund performance measure.
INREV has made great progress with the index since the index was launched in 2005. For the 2006 release, the index comprised 206 funds representing €153bn, a 43% rise in the number of funds compared to 2005. The release reported that European institutional funds non-listed funds returned 20.9% in 2006.
The index, which is independently calculated by IPD and distributed to INREV members, has a reporting history dating back to 2001. It has developed to include a range of performance driver sub-indices, including sector, geography, investment style, leverage, fund vintage and investor base.
However, the index has both its strengths and limitations as a performance measure and its improvement will continue to be a main priority for INREV in 2008. To this end, the index was one topic of discussion at a one-day workshop in London late last year which gathered views from members on how to take the index forward.
The index's strengths lie first in its existence; it is the only measure of European non-listed property fund performance and its creation has contributed to efforts by INREV members to bring transparency to the sector. The index measures annual net asset value-based performance, taking into account the effect of fees and leverage. It allows the industry to have a ‘top-down' performance measure for the property funds sector and gives investors a valuable first-step tool to help compare performance of their non-listed allocations to their direct and listed portfolios.
The growing size of the index has also resulted in some useful comparison performance data for peer group comparisons. The creation of sub-indices gives investors and fund managers an opportunity to compare their own funds with similar vehicles and for the industry to begin to understand the sector's main performance drivers.
What the index is not yet recommended for is for the benchmarking of fund performance or for use in relation to performance fee targets for fund managers. Moving the index to this status is clearly one of INREV's priorities and was discussed at the workshop. There is also presently no ability to compare the performance of individual funds, with data presented only in an anonymous aggregated form.
Behind all these improvements lies one key factor - size. A growth in the number of funds in the index universe from the current 206 vehicles would improve the reliability of the index and strengthen the composition of the sub-indices.
This growth relies on the goodwill of fund managers to share their data, which can be time consuming. The workshop discussed how fund managers can be incentivised to do this. Members felt that providing reports of which quartile managers' fund were positioned that year within the index would be useful. This year IPD will provide each contributing manager with a one-sheet comparison document for their funds.
It was also recognised at the workshop that investors played a crucial role in encouraging fund managers to deliver their data. INREV is looking into developing standardised language for investors to use in their negotiations with fund managers, if they wish, to influence the fund to deliver data for the index. There was also discussion about aligning performance reporting to investors with requirements for the index so that fund managers only had to calculate one set of figures.
On the topic of whether the non-listed industry wanted INREV to push for fund level performance, there were mixed views from the workshop. Currently, information delivered by fund managers remains anonymous and is only presented in an aggregated form. This would be a major next step in transparency for the industry but workshop attendees argued that it could be too early for such an initiative, and also questioned whether it was actually required by investors. The consensus was that fund level performance should be pursued but that INREV's first priority should be to increase the coverage of the index and strengthen the sub-indices. This would give fund managers and investors the levels of peer group comparison that they currently require, and while being able to compare actual funds, it was not crucial for the market at this stage.
For the 2007 release, INREV is proposing to create a styles sub index which would deliver results by core, value added or opportunity funds. This initiative is being developed in line with the styles framework research. INREV also proposes to provide capital and income splits on performance for each sub index.
The workshop was also an opportunity to discuss with members the importance of bringing reporting methodology in line to improve the consistency of the data being delivered for the index. In September 2007, the INREV NAV was released, which is guidance on calculating a recommended net asset value for non-listed funds. INREV NAV will be promoted during the collection of the index with investors also supporting its implementation among fund managers.
The 2007 index will be launched at INREV's annual conference in April. This year is not expected to be an easy one for the real estate industry and the non-listed sector is already adjusting to a new climate where the availability of debt has reduced, which could impact performance. Much more emphasis is expected to be placed on the outperformance of managers.
With this in mind, the reporting of performance figures for the industry is particularly crucial as the availability of reliable and transparent performance data becomes increasingly important. INREV is determined to keep up the transparency of information on the non-listed property funds sector during changing market conditions, but we need the support of our members and non-member fund managers and investors to do this.